As we start a new year, it is always useful to take stock and review the key highlights and changes in the banking legislative arena.
2021 saw a raft of significant regulatory developments in the UAE, of which a few key banking updates are highlighted below.
The UAE Securities and Commodities Authority (SCA) issued a new rulebook for licensed financial activities which came into effect on 17 May 2021 (the SCA Rulebook). This is a significant development as it replaces 17 previous regulations that individually applied to various licensed financial activities and sets out a consolidated regulatory framework for the licensing and prudential requirements for SCA licensed entities. The SCA Rulebook represents a more accessible, streamlined and structured approach to financial regulation, which aligns with international standards and best practice. Of the many changes that have been made, one of the most notable are the changes to the definition of ‘‘Professional Investor’’, which now includes a wider class of entities and also provides that promotions to all types of Professional Investor are exempt (historically, this only included investors who were not natural persons).
It is strongly recommended that any entity licensed by SCA - or which is looking to be licensed by SCA - review their current financial activities to confirm they are being conducted in accordance with the SCA Rulebook.
Another interesting development in the banking sphere is the enactment of Federal Decree Law No. (16) of 2021 on Factoring and Transfer of Receivables (the New Assignment Law). Although historically in the UAE, assignment of debt (or obligations) has been covered by the UAE Federal Law No. 5 of 1985 on the Civil Transactions Law (Civil Code), the New Assignment Law is the first federal law in the UAE which deals with assignment of rights. A key takeaway is that acknowledgement of a notice served pursuant to an assignment of receivables is not required for perfection purposes.
Another interesting point - particularly for the SME market - is in relation to factoring, which is defined in the New Assignment Law as “a transaction whereby the Transferor transfers the
current and / or future receivables to the Transferee, or an agreement between the parties that the Transferor shall retain the entries relating to and collect the receivable transferred and to afford protection to the Transferee in case the Receivable's Debtor defaults on payment.”
Although the enactment of this law has sparked much interest among various financial entities eager to enter the factoring market, it should be noted that the law specifies that factoring can only be exercised by entities licensed by the UAE Central Bank and according to the terms and conditions to be defined under a resolution of the Central Bank- which may appear to limit the types of institutions that can carry out factoring. We are awaiting further guidance as to more detailed terms and conditions of the New Assignment Law and will monitor this space.
Finally, a continuing hot topic, both in the UAE and globally, is in relation to all things related to crypto assets, which is a rapidly evolving market.
On 25 October 2021, the Dubai Financial Services Authority (DFSA), the regulator of the Dubai International Financial Centre (DIFC), published its regulatory framework in relation to investment tokens, the first stage of the DFSA’s digital assets regime.
Like many jurisdictions, Dubai is seeking to develop its regulatory framework for virtual assets and markets, including in relation to items such as non-fungible tokens and cryptocurrencies. A further example of this is the announcement in September 2021 that the SCA and the Dubai World Trade Centre Authority (DWTCA) have entered into an agreement in relation to the regulation, offering, issuance, listing and trading of crypto assets and related financial activities within DWTCA's free zone. This will enable DWTCA to support businesses underpinned by blockchain and cryptographic technologies and will allow it to broaden its regulatory, licenses and services capabilities. This is obviously a very exciting development and will be watched by investors worldwide, who are eager to enter this market once the legislative framework is completed.
One of the key concerns globally regarding crypto assets surrounds potential money laundering issues- a concern which has been addressed by the amendment in September 2021 to Federal Decree Law No. 20 of 2018 on Anti Money Laundering, Combating the Financing of Terrorism and Financing of Illegal Organizations (the AML Law). The amendment has created a new category of institutions that need to comply with the AML Law- namely, virtual asset service providers- and provides that it is prohibited for any natural or legal person to practice the activities of virtual asset service providers or any of the financial activities without a license, entry or registration, as the case may be, from the competent regulatory authorities.
Thus it is clear that in line with many other jurisdictions globally, the UAE is continually monitoring and evaluating the regulatory framework and necessary changes to be made thereto in order to provide current, applicable legislation suitable for the rapidly developing crypto sphere. One of the key issues evident globally is that the pace of development in the crypto sphere can often outrun the speed of legislative reform. However, one notes continually evolving developments in this regard in the UAE, by virtue of legislation in onshore UAE and in free-zones- including the recent applicability of AML legislation to this sphere. There appears to be a continual assessment in many countries worldwide as to the balance to be struck between the need to allow crypto assets and currencies to thrive unregulated, with a need to protect investors generally and combat the use of these rapidly developing technologies and assets for money laundering purposes. The developments in the UAE legislative sphere appear to be striking the right balance and are creating a lot of interest by investors globally.
We await in anticipation further legislative developments and reform in the UAE’s banking sphere in 2022.
For any enquiries relating to banking and finance matters, please contact the Banking & Finance Team.